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Ep 56: Spotting Oversold & Overbought Conditions in the Stock Market

October 8th, 2015

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Welcome to the stock market Rapid Recap, I’m Sasha Evdakov, it is October 8th, 2015 and today we’ll be discussing Spotting Oversold and Overbought Conditions in the Stock Market. I always try to aim for I lesson out of these recaps and try to teach you something new or different, or emphasize a certain core principle.

In this week’s lesson what I’d like to focus on is looking at overbought and oversold conditions and how to spot certain bounces. I’ve been building to this concept over the last couple of weeks.

We’ve been talking about it, we talked about how the market has been oversold and then did a training video about scaling in, we also did a video about bottom fishing. So we were pretty much planning for a bounce to happen and just a way that things were moving and acting there’s always things to be cautious about.

In today’s lesson that’s what we’re really going to hone in and focus on. Before we get into the lesson and just talking about some stocks, I do want to let you know that we do have the penny stock book that’s coming out, probably not next week but the week after that, so that book will be available for all of you who like to trade the cheaper stocks, or penny stocks and it’s going to be mostly just 95 percent of the book is all just charts.
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So it’s about charts, about penny stocks, about penny stocks breaking out higher, about spotting patterns within penny stocks, it’s about shorting penny stocks, so it’s going to be a mix of charts and there’s a bunch of different charts that you can look at, spot, all specifically focused on penny stocks or really cheaper stocks, just stocks that are less than 10 dollars.

Now, typically the penny stock definition, the official definition is stocks less than 10 dollars. In this book, I focused on stocks less than 10 dollars because ideally the goal of trading penny stocks is to trade the cheaper stocks, so those are the stocks that we’ll be covering in that penny stock book and that is going to be the cheaper stocks.

That book should be out probably by the 15th or 16th of October, so that’s kind of what we’re going to be aiming for but probably not next week’s rapid recap but the one after that. Now if you’re on the newsletter list you’ll definitely get notified when this book is released.

Make sure you’re on the newsletter list and if you’re not and you want to get on it just go ahead and enter your name and email address right there and in that way you can get notified when things are released.

Also if we have special on courses, discounts and things like that, because we do promotions from time to time on other training courses or you can get a huge discount on the training material, but initially and typically for previous newsletter members and previous customers.
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Just make sure you get on the newsletter list and that way you can be notified if any releases happen or come out.

Now, let’s take a look at the market and see how it’s acting, behaving, what it’s doing, what’s happening and just what’s been going on with the overall index and what we’re coming into.
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Here we are looking at the Dow Jones, now for me personally I like looking at the Nasdaq composite or the S&P, that’s typically what the market is run by, it’s the composite but in this case let’s just take a look at the Dow Jones, because a lot of people look at the Dow Jones.
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Here was our primary support line and when you look at that line you can take it out and you can see that this was a support line that was pretty heavy throughout much of 2015 and we did end up breaking that support line, and when we broke this, we ended up selling off dramatically and we sold off pretty big, we sold off about 2000 points or shed-off about 12 percent from those mid-range areas, or average areas that we were idling at.

We did pop a little bit higher so we did raise higher and then again we had a fairly dramatic move about 800 points to the downside and now again we’re popping from that swing point. So you might be wondering, well I was short and I was trading short and you might be wondering what is going on with the market, what is the trade now.
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Do I change my direction? Or do I change my analysis of the market, or the stock if I’m trading these stocks. You have to be mindful of what is fueling the market, what’s continuing to fuel the market and what’s coming up in the future.

First off, what do we have coming up in the future, well we have earnings coming up in the future. Me personally I’m still a more bearish than I am on a global scheme of things I’m still more bearish than I am bullish.

That doesn’t mean I may not take a trade for two or three days to the upside or to the long side. Typically, what may happen, get this to your mind because this concept took me a while to understand as far as being a trader.

For example let’s just take Exxon Mobil, as this might be a good example. Overall if you’re trading this stock, if you’re trading the stock you might have been short in this company all the way over here and you might have been traded it short here.
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As you get to certain levels, as you learn to evaluate companies and stocks better, you start looking at what’s going and what’s happening after we did our run so big, after we did a 30 percent run or 30 points, to the downside, what’s going to happen to the stock.

Typically, they bounce after you get to oversold condition, does that mean that you know change your whole analysis and go long, no. In fact, what happens and what typically traders, such as myself do, if we’re up at higher prices, even up here or even up here we’re still short, our overall average position might be short.

However, once you start seeing little bounces like this, what you may end up doing for couple of days or it could be for a week, is you put on half of the position to the long side and you might hold it for a week or two.

However the rest of your position might be short, over here you’re still short but over here you get in and you have some long shares. Now you may need to do this in different accounts and so forth, but nevertheless the overall picture of the position is still that short even though you may have some shares that are pointing to the upside and these could be just for a day, a week or quite a long time,

And you might end up changing your whole position and analysis if things break, but keep in mind the market is dynamic and if you’re trading it’s dynamic, that means you have multiple things happening at the same time.
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This is typically what happens as you get more and more advanced or can handle and manage the positions better. So what you may do even you just do an ABCD structure, so let’s just say you go A to B, B to C and C to D.

Let’s just use that as a structure, so what you may end up doing as a trader is you may be short here and then you might actually decide to go long right here but only half the shares. So if you have 1000 shares short you might end up going 300 shares long over here because you know that stock is going to retrace.

Then again you get rid of this 300 shares here and then you go short, again let’s just say maybe you add 200 more shares short from the profits of these, of these long position so it’s dynamic. This might be over some people’s heads so I don’t want to get too deep into this, maybe this would be something else or deeper study that we get into later.

Maybe on a course or something like that but this becomes a dynamic market so when you look at the Dow Jones, my whole point of explaining is that start looking at the Dow Jones, my bigger long term picture still the market is kind of high and it’s still fairly toppy.

Now we are lower prices than where we were but we are still moving up and we still have this large resistance area right here that we could be coming into and this is where things could create trouble for the market.
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If you look at the composite, which is the Nasdaq composite, the same thing applies so with the composite it’s typically what leads the market so this 4900 is the level you’re watching and this 4900 is something that you want to pay close attention to, so even though we’re moving up right here you know we’re bouncing at this level, that doesn’t mean it’s going to explode to the upside.

It may just get into right here and just like it did right over here and then sell-off again so you have to be very careful and cautious of how things are breathing, and now with earnings around the corner you have to be mindful and what you want to do is you want to watch bigger companies such as Apple.
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How are they moving? The powerful companies, how are they moving in these markets, or in these conditions, so you’ll notice that some companies like the Netflix overtime become oversold or overbought,

When they get too far extended, this is overbought and when they get too far extended to the downside or oversold then they’ll have bounces. Now here Netflix is raising prices and potentially this is why that stock popped and this is what another support area, here was a gap.
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There are a lot of factors that could be contributing to it but right here you notice that we did have a slight pop in that stock with fairly nice volume and there was your gap as well. So always be mindful at how these stocks and companies are moving and where have they been.
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Exxon Mobil for example, if you look at the overall price of where has Exxon Mobil been I mean we were up all the way over here at 103 and now we’re down to 72, so is it oversold, potentially yes. I mean you look at it in a regular real life world example, if something is this discounted so cheap, is it worth it to buy it?

Let’s just say for example a brand new 3D Television and I don’t know, I don’t have a TV, I don’t know exactly what they cost but roughly I would say they cost anywhere between 700 dollars and 2000-3000 dollars depending on the size you’re looking to get.

Let’s say one thousand dollars for a TV is the average or normal price, and now from that one thousand dollars we’re down to 70 dollars, so let’s just say 700 dollars is that fairly cheap or discounted? That’s pretty discounted.

Now, what happens if it was a hundred dollars brand new in the box from the store now that’s a steal, you want to buy them and in fact that’s exactly what I do in fact I just bought 6 or 7 brand new monitors 24 inch screens here because they were on discount, from after back to school the fall sales that’s what happens is when things are at such a low price you get in to the stock.

This is what happens with some of these stocks, is they get so low that they become so low that they become so attractive for those value buyers. Now does that mean they’re going to continue powering higher and getting to a hundred or a hundred and three?

No, that doesn’t necessarily mean that, what it means is that they could come up and come to those next potential levels. For example Exxon Mobil, could get to that 83 dollar level. You also have stocks like Wynn, like the bottom fishing notice the volume coming into this stock.
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Notice how this one has been selling off since 2014, we sold off a hundred and eighty eight points from here to here, imagine if you had a hundred shares, thousand shares, or five thousand shares, what your profits would be if you were short from that 40 level to now 75.

Now granted you could too get in the stock, here was an ABCD pattern by the way. If you were dynamically trading, you would trade this to the upside, short that stock here and still hold your upward position and then continue moving it to the upside.
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Then once it breaks this line right there you could have went short for a nice capture of a hundred and thirty points even to the safe side, even if you were doing a slight little ABCD pattern, right here, little retracement there again from here even if you got in late 80 points.

As you start looking at this, the farther these stocks go lower, the more that they go lower this creates an oversold position and that’s where things become attractive and if you look at the daily, right here you can see all these volume coming in where basically there haven’t been too many days that move like this, and this becomes attractive at this 55-75 dollar level.
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It’s because they start looking at this 140, they start looking at this 140, potential and where’s market? That market’s also bouncing a little bit, the market was a little bit sold off.

The same thing happens with companies like IBM, we get back up in to this supporting region or area, here was our swing low, we had our short for a little bit but now we’re kind of getting back up there. The shortened run as far as I expected it to but these bounces do come and you always have to protect your capital,
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You always have to protect your move and your trade, so you’re always looking at how things are getting into these levels.

Twitter, as well you can see that from here, from this 50 dollar level we had this double tap right that  this stock was in its oversold area right here. Now does that mean it’s going to continue powering higher to 55, no.
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It just means now for the time being, we have a slight bounce and it’s getting above this 30 dollar level, it’s trying to get above this level. Do I still think it’s a weak company? Yeah, absolutely I still think it’s a weak company.

Do I want to be in a long trade on it? Or would I rather be in a patient, waiting for a short opportunity? I would personally rather wait for it to bounce higher and then short it. You know, that’s what happens with a lot of different trades, is it’s sometimes better to wait for the other opportunity when things setup rather than chasing these bounces.
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A lot of people feel like they have to trade every day, like they have to get into that stock but favorable position, you want to look at what’s favorable, are we overbought or oversold? Now if you’re oversold like we are right now in here,

And you’re looking for an upside in the stock, you might want to be a value buyer and bottom fish and try to get into this stock and potentially use this 29 – 33 level as your stop. There are a lot of companies like that, that are creating these little bounces right now.
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Look at Alibaba as well, here trying to bounce at 58, 59, or 60 dollar level, it’s trying to really bounce at this area and that’s what happening, as the stock market bounces especially these stocks that are oversold are trying to get a little boost.
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We Have Trip. Trip is aiming to bounce, so even though we’re bouncing on these different companies does that mean that I’m long the stocks? No, not at all and I wouldn’t go long with these stocks because I’ve seen it more times than not.

What I’ve seen happen is when these bounces come, eventually if they’re week they will roll over especially this bounce here on trip, on the weekly and then we still have one day to go. 4.8 million shares on the bounce and 7.2 million shares on the bounce, that’s weak compared to the past.

12.1, or 16 million that’s still weak to me, because what I’ve seen is these things happen, what I’ve seen is that stocks like this will bounce right here, this is the weekly keep in mind, so 1 week, 2 weeks, 3 weeks, 5 weeks.

They will bounce for 5 weeks and if we take it out to the daily, you can see that we’ve bounced for multiple days, we bounced here come back retested, bounce here by then explodes back down to the downside.

The rag gets ripped out from under these stocks, and one of the ways to really just understand when overbought or oversold areas are, is just to watch and learn charts. Watch and learn how stocks come up and how they come down.

The more often that you watch charts, you study charts, you watch how stocks move the better at it that you’ll get, it’s like learning how you breathe, the quicker you breathing, you know after a run or after biking, marathon, you’re going to know that it takes you time to recover.

The same thing here in the market, if you go up too fast, if you accelerate very quickly you’re going to need time to recover, if you sell off too quickly again you’re going to need some time to recover and digest the move no matter what direction you go.

Then the equilibrium or the average, the good or the healthy prices probably somewhere in the middle, somewhere around that region, so ideally what you’re trying to do is trying to find a lower or a higher point between these oversold or overbought regions and a lot of this has to do with just putting in the time, putting in the time and the market.

For those of you that are brand new to the market or just starting out or just maybe learning to trade, just in the last couple of weeks or months this might be new to you to see stocks sell of quite heavily and then bounce and then you don’t know what to do, you don’t know if you should be changing your position to the long side.

You have to remember that this is a longer term game and as you start looking in and evaluating these stocks, just like a GoPro you have to look at what’s been happening over the long term, the longer term has been to the short side,
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Then we bounced, we bounced and this is where a lot of people were screaming to buy, but the professionals knew that this is the time to get out of some positions and start building for the next leg down.

BOM, we get in to the short side, again we build, build and then couldn’t break it and we continue moving lower and since that point really that’s a 35 dollar point and you can see if you look at the daily that there’s always going to be little bounces like here.

It bounces here to retest, it bounces here but you got to look at the bigger picture and we continue to move lower at 27 dollars.
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Similar to BABA, a lot of people screaming for this stock to be going higher, to the upside and now look at where this stock presses, it’s at 116 and now we’re at 67 so if you really were screaming to buy Alibaba back in the day, you can now get it at pretty much half price.

It’s a lot more discounted now if you’re really looking in to getting into the stock. Remember, this game and business is about probabilities, it’s about taking profits, learning to read the trend, learning the movements for the longer term.

If you’re just trying to catch things on a small basis, for a thick movement here or there it’s going to be very difficult because you have to look at the overall energy, energy of how that stock is moving. Overall, where is it? How is it moving? Is it over bought? Or is it over sold or over extended?

It’s kind of like looking at move in a stock where you’re looking at a healthy movement and if we look at, let’s pull out a blank canvass here. Here if we look at an overall trend of a stock, so you can pretend that a stock is moving here, is a move that moves like this healthy, no not at all because it’s overextended.
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How about a move like this? Probably not, as you start rounding out different angles of the move, what’s a healthy move in a stock? Well probably something around a nice steady pace that allows consolidation and movement.

For example a movement like this is probably one that doesn’t generate enough profit, so these movements and arrows probably don’t generate enough profit or most people don’t want to be in them they’re too slow those are the stable companies.
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Moves like these are probably overextended, so these are probably not healthy at all because those stocks will come back down because they’re like a rocket ship they’re up too quick.

The better approach is to trade things that are moving more like these arrows right here, at this angle or even like at this angle depending on how much risk you’re looking to take on.

In this case, you can see the angle, the angle here, and here but if we look at coke, look at the angle that we’ve been moving on right here to the upside, this is a stock that’s overbought. Looking at the extension, it’s too fast, the angle.
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For those of you who are little more technical, and you want to see what angle or what angle or degree something like this would be too quick, fast, if you’re looking at something a little bit more longer term, something like this could be a little more healthy and this appears to be more healthy.

However, the breakout movement from here to here is what we’re looking at, if we’re looking at this recent breakout, the recent breakout is a little bit too quick and that’s why we should expect a pullback and that’s why we have this bar going back at three percent.

Now we’ve been over pulling back at three percent does that mean I would short the stock? Absolutely not, because we’re already up 23 percent, 40 points in just the last fourteen days. So the stock has power, the stock has support.

It has good buying that’s coming in but it’s overbought, it’s overextended, it’s a little too far on its price more than I would want to pay, just like buying a radio, television or computer if it’s higher priced, if an LCD is 6000 dollars, or 15,000 dollars it’s probably too much and overextended.

For most people, they aren’t used to looking at stock prices, they’re not ready for those stock prices or don’t understand the movements and behaviors of those prices and if you don’t then it’s typically difficult to see when things are overextended, oversold or overbought.

Hopefully, this video gave you some insight and help regarding overbought and oversold conditions. I know that we can probably talk about it on more details and other more complicated ways because there are other indicators that you could look at to spot overbought and oversold conditions.

However, those indicators a lot of time from what I’ve found, tend to confuse people, so if you stick to more of looking at the angle of the line, something like this, something like this, it’s a better approach than trying to look at an indicator something down here and figuring something out that will give you where is the overbought or oversold conditions,

Because you’re looking at multiple things, you’re looking at the Dow Jones, at the Composite, you’re looking at all these indices like the IWM, the Russell so when putting all these things together you start getting a feel for are we overbought or are we oversold and it’s just learning about pricing, it’s learning about prices, their movement, action and behavior.

Thanks for joining me, I hope you enjoyed this video, I know this was a little bit more of a calm video, rather than more of an exciting video but learning to understand where these bounces come, learning to understand price movement extensions if they’re too far extended, whether to the upside or to the short side, or down side.

It’s something that just takes time to read and build, so you need to put the time into it to learn to read these charts and because these bounces do come and as you become more advance and more proficient in trading.

You start putting on dynamic position as something that I mentioned earlier and gave you a taste of that’s far beyond the YouTube videos that becomes even more complicated as we dig deeper into that subject matter.

I hope you enjoy some quality time with the family, do some readings, some studying, put some education time to the market and continue to improve and get better.

I’ll see you next week.

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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